RAVAS Lays Bare The Channel Islands Government’s Attempts to Mislead Over the Effects of The Channel Islands VAT loophole

A group of retailers campaigning against an industrial-scale VAT avoidance scheme that has destroyed or damaged their businesses and cost the taxpayer hundreds of millions of pounds has today hit back at the Channel Islands Government’s attempt to mislead the UK authorities and its residents over its true scale and consequences.

Retailers Against VAT Avoidance Schemes (RAVAS) is a UK pressure group of independent retailers fighting the practice of large retailers avoiding VAT by routing their products through the Channel Islands. The large retailers are able to do this because of Low Value Consignment Relief (LVCR), a relief created by Directive 1983/181/EEC that exempts from VAT any exports below a certain threshold value, which the UK government has set at £18, but which could be as low as £10. The original purpose of LVCR was to expedite the processing though Customs of perishable goods and to save the administrative costs of collecting small amounts of VAT.

The Channel Islands are outside the EU. Hence since the turn of the century and the advent of Internet retail, large retailers of especially CDs and DVDs, but now increasingly other products such as memory cards, computer games, gifts, cosmetics, fishing tackle, greetings cards, contact lenses car parts and ink cartridges, have been routing goods through the Channel Islands. In 2005 HMV, one of the major players in the UK music industry opened a distribution centre on Guernsey, as part of a stampede of major retailers to offshore facilities in an attempt to compete with the leading offshore mail order company Play.com.

As a result, onshore UK retailers, unable to compete with offshore VAT-avoiding competitors, have been going out of business at an unprecedented rate. Both high-street chains – such as Zavvi and Fopp – and pure-online retailers such as Delerium Mail Order, based onshore in the UK, have disappeared, proving that the determinant of success is not whether a retailer is on the high street or online, but whether they sell from onshore or offshore facilities.

Although LVCR is created by EU law, the EU Directive creating it also stipulates that it must not be allowed if it distorts competition or creates any evasion, avoidance, or abuse. The Principle VAT Directive – 2006/112/EEC, previously 1977/388/EEC –  also stipulates that “similar goods bear the same tax burden,” a condition clearly violated if goods routed through the Channel Islands are VAT-free while competing and equivalent products that stay onshore are taxed. Her Majesty’s Revenue & Customs has recently admitted to RAVAS that LVCR is being used for a purpose totally contrary to its intentions. Up until now, the UK government, for reasons best known to itself, has refused to do anything about this avoidance that is costing it over £100m a year and destroying several of its viable businesses in its most important cultural export industry.

However, the governments of Jersey and Guernsey where many of the firms taking advantage have distribution facilities, have attempted to pin the blame for these companies’ demise on music downloads, supermarkets, or the general shrinking of the CD market. An article in a Guernsey newspaper last week claimed that the islands were a target of convenience when the real problem lay elsewhere. The Guernsey government makes its claims downplaying the consequences of the avoidance trade in a document entitled “Setting the record straight.” RAVAS, and many other interested parties, have been unable to obtain a copy but are aware of the arguments it contains. “I think they must have been embarrassed to publish it,” says Allen. “All of its claims are so easily disproven, it looks like a deliberate attempt to obfuscate a very clear issue: if one business has to charge VAT and another does not, the VAT-avoiding business will put the VAT-paying one out of business for reasons totally unconnected to the quality of its products. That creates a distortion of competition that is bad for the economy. End of story.”

In a comprehensive rebuttal document entitled Change the Record: How the Channel Islands Governments deliberately downplay the effects of the exploitation of LVCR via the Channel Islands, RAVAS has dismantled all of the misleading claims and arguments put forward to justify the abuse of LVCR. Allen summarises: “Downloads are still marginal in the albums market, where most of the independents were operating, and in fact when most of the independents went out of business downloads accounted for only 4.29% of the albums market. Supermarkets have been in the business for 15 to 20 years and not changed their position much since 2005, when all the problems with LVCR started; they also serve a different demographic. As for the general shrinking of the CD market, the rate at which independents have been going out of business is totally disproportionate to that. The fact is that there is a double distortion. First, online sales of CDs have increased their share at a rate disproportionate to the gains they were making before. They went from 11.6% in 2006 to 29.6% in 2009. Second, while this would have benefited businesses like mine – a pure online operation – if it had been the result of natural organic growth, what actually happened is that almost all of the onshore online retailers of CDs have gone out of business, because 96% of online CD sales now come from the Channel Islands, where providers don’t have to charge VAT and hence get the gift of a 20% price advantage.”

Allen points to the opinion of Matt Moulding, CEO of thehut.com, a fast-growing provider of offshore fulfilment services. He told the Guardian in March 2009: “Everybody does it…If you aren’t offshore you couldn’t possibly compete. Your cost price would be above what people would be retailing at.”

RAVAS believes that the Guernsey government’s motivations are very transparent. “It is clear why they are saying this,” says Allen. “There are many jobs in Guernsey now tied to the LVCR trade, even if the Guernsey government’s figure of 600 might be an exaggeration.” However, I think in the long run this labour could be put to more productive use. What really is the economic value add of an immoral tax avoidance trade? In the short run, if the UK government closes this down it will recoup somewhere between £130m and £200m in lost VAT. I wouldn’t be against this being used to help the Channel Islands economies readjust. In the long run they are better off not being dependent on this trade.”

“Despite all of the attempted obfuscations both by the Guernsey government and by the people from whom HMRC has sought its advice – offshore tax consultants with a vested interest in seeing the trade continue – this is really very simple. LVCR was never intended for this. At the end of the day even my 11-year-old daughter can see why a 20% price disadvantage is fatal. No amount of explanation or discussion will justify it. It’s just plain wrong.”